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University of Michigan Health System study shows payment differences of $2,549 for colon surgery, need for efficiencies in post-discharge care

Wide differences in payments for surgery suggest that Medicare and other payers could save money by bundling payments.

Medicare payments for four common types of inpatient surgery—hip replacement, coronary artery bypass grafting, back surgery, and colon removal— and their follow-up care can vary among hospitals by 49 percent to 130 percent, according to a new study by the University of Michigan Health System.

The result is that payments to the highest-cost hospitals exceed those to the lowest-cost facilities by up to $2,549 for colon removal surgery and $7,759 for back surgery. The study was published in the November issue of Health Affairs.

The study, one of the first-ever to examine differences in surgical payments, was led by David C. Miller, M.D., an assistant professor of urology at the U-M Health System. It analyzed Medicare claims data from 2005 to 2007 for the four inpatient surgical procedures.

The difference of up to $7,759 in payments per surgical episode persisted even after adjustments for such factors as the severity of patients’ illness. The study concluded that nearly 30 percent of hospitals are receiving payments above the national norm for multiple common procedures.

The wide differences in payment suggest that Medicare and other payers could reap considerable savings by combining reimbursements to hospitals, physicians, and other providers into a so-called bundled payment— in other words, make a single payment for a defined episode of care.

The Centers for Medicare and Medicaid Services has already launched a demonstration project to evaluate the use of bundled payments for certain procedures, including hip replacement and bypass surgery, and it is evaluating other potential payment bundles as well.

The new study “doesn’t prove absolutely that bundled payments will work, but it demonstrates the potential for cost savings under this model,” says Miller.

To examine the differences in payment, Miller and his colleagues at the Center for Healthcare Outcomes and Policy at the University of Michigan and the Dartmouth Institute for Health Policy and Clinical Practice looked at payment information for all services from the date of hospital admission for surgery to 30 days after the hospital discharge.

They adjusted the data for all predictable factors, such as regional differences due to wage rates and found that the variation in payment levels was driven by several factors.

Some of the variation was driven by differences in surgeons’ practice styles, such as: inpatient consultations by hospitalists; critical care physicians; and medical specialists.

Other variations were attributable to the amount or cost of care that surgical patients received following a hospital discharge, such as care provided by rehabilitation hospitals, home health care agencies, skilled nursing facilities, and nursing homes.

Miller notes that the study did not attempt to determine whether differences in payment equated to differences in quality. That relationship, he says, remains to be determined.

However, for high-cost hospitals, the study’s findings could serve as a wake-up call to increase efficiency and reduce costs.

“Many hospitals have considerable room to improve their cost efficiency for inpatient surgery and should look for patterns of excess utilization, particularly among surgical specialties, other inpatient specialist consultations, and various types of post-discharge care,” the authors wrote.

Those efficiencies are likely to come from better care coordination and better communication across episodes of care, according to Miller.

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